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Dairy Crest Group PLC  -  DCG   

Interim Results

Released 07:00 10-Nov-2016

RNS Number : 7951O
Dairy Crest Group PLC
10 November 2016
 
 

 

10 November 2016

 

Dairy Crest Group plc ("Dairy Crest")

Interim Results Announcement for the six months ended 30 September 2016

Highlights

·    Increased profits - adjusted profit before tax up 19% to £19.1m1,2

·    Cathedral City launched new branding and packaging  with a successful marketing campaign

·    Clover, Country Life and Frylight all enjoyed strong volume growth

·    Improved underlying cash generation - operating cash inflow3 of £17.5m, up  £27.9m on last year

·    Good progress made in functional ingredients for the infant formula market

·    Proposed interim dividend up 2%

·    Full year expectations remain unchanged

 

Financial Summary

 

 

Half year ended 30 September

 

2016

2015

Change

Revenue 1 :

£190.0m

£203.8m

-7%

Adjusted profit before tax 1,2 :

£19.1m

£16.0m

+19%

Profit before tax 1 :

£15.6m

£13.1m

+19%

Adjusted basic earnings per share1, 2 :

11.1p

9.3p

+19%

Basic earnings per share 1 :

9.3p

7.6p

+22%

Profit/(loss) for the period:

£10.2m

£(109.4)m

+£119.6m

Operating cash flow 3:

£17.5m

£(10.4)m

+£27.9m

Net debt:

£262.3m

£242.3m

+8%

Interim dividend:

6.2p

6.1p

+2%

 

1 From continuing operations

2 Before exceptional items, amortisation of acquired intangibles and pension interest (see notes 3 and 7 to the interim financial statements)

3 Cash generated from operations, less capital expenditure, before exceptional cash outflows of £12.0m  (2015: £8.1m)

 

 

Mark Allen, Chief Executive, said:

 

"We are pleased to have delivered a strong set of interim results in our first full trading period since the sale of Dairies. Our four key brands are continuing to perform well in a challenging marketplace, with strong volume growth for Clover, Country Life and Frylight and a successful launch of new branding and packaging for Cathedral City.

 

"We are also seeing the benefits of Dairy Crest's transformation into a leaner and more focused organisation, with strong profit growth and significantly improved cash generation during the first half. Our expectations for the full year remain unchanged.

 

"Looking further ahead, the significant investment at Davidstow has opened up attractive opportunities in high-margin, global infant formula markets as well as the potential to develop new functional ingredients. Combined with our continued focus on innovation within our key brands, this will underpin future growth and help us to maintain our strong track record of rewarding shareholders with higher dividends." 

 

For further information:

 


Dairy Crest Group plc








Alistair Smith




01372 472236


Olivia Seccombe




01372 472249








Brunswick









Max McGahan/Mike Smith/Rebecca Lum


020 7404 5959


 

A video interview with Mark Allen, Chief Executive, and Tom Atherton, Group Finance Director, will be available from 07:00 (UK time) from the investor section of the Group's website investor.dairycrest.co.uk. 

 

There will be an analyst and investor meeting at 9.00 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED.  An audiocast of the presentation will be available from the investor section of the Group's website investor.dairycrest.co.uk later today.

 

This announcement contains inside information.

 

Operating review

 

A new era of growth

 

Our success has been built on our links to the countryside, our dairy heritage and the people in our business. Following last year's sale of our Dairies business, we are now a lean, more focused organisation with a simple business strategy to produce high-quality food and added value functional ingredients  

 

The significant investment at Davidstow gives us further growth opportunities in high-margin, global infant formula markets as well as the potential to develop new functional ingredients. The Innovation Centre at Harper Adams University demonstrates our increased focus on innovation in our branded and ingredients businesses.

 

Innovation is at the heart of what we do and we have a successful track record of delivering consumer-focused innovation and new product development. Recently we have introduced, amongst other things, a new Clover recipe with 'no artificial ingredients', a much improved Cathedral City Spreadable range and a number of new Frylight variants.  We target 10% of revenue from innovation less than three years old and delivered 11% in the year to 31 March 2016.  We have improved that to 13% in the first half of this year.

 

Market background

 

After two years of very pronounced deflation, most dairy markets, both in the UK and worldwide, have seen a return to inflation in recent months as milk supply has fallen.

 

We continue to pay our farmers a competitive, sustainable, market-related price to ensure a secure supply of high quality milk. We have announced farmgate milk price increases of 4.3 pence per litre (20%) since the summer.

 

Key brand performance

 

Brand

Market

Volume growth*

Value growth*

Cathedral City

Cheese

-5%

-11%

Country Life

Butters

+8%

-2%

Clover

Spreads

+7%

-8%

Frylight

Oil

+16%

+16%

Total


+2%

-8%

 

*   Dairy Crest volume and value sales 6 months to 30 September 2016 v 6 months to 30 September 2015

 

In aggregate, volumes of our four key brands (Cathedral City, Country Life, Clover and Frylight) grew by 2% in the first half of 2016/17 versus last year.  This is a strong performance in a challenging marketplace. Deflationary pressures persisted for much of the first half and this impacted sales, which were down 8%.

 

Cathedral City maintains category leadership

 

In the first six months of the year we successfully rolled out a new master brand identity for Cathedral City.  The new design simplifies the brand, improves visibility on shelf and strengthens our range, allowing us to build equity across all subsectors of the growing cheese category.  It was supported by significant investment including a successful new TV advertisement, "The Rules of Cheese".  We have seen a positive consumer reaction both to the new packaging and the marketing campaign.

 

The first half also saw the relaunch of Cathedral City spreadable in three flavours: Mature, Extra Mature and Garlic & Herb. The second half will see increased listings and the launch of a new flavour, Lighter Mature.  Innovation will remain key to our future growth.

 

IRI data for the 28 weeks ended 8 October 2016 compared to the same period last year shows that the Everyday Cheese market grew 1% in volume but was down 4% in value terms. For much of the first half there were high levels of cheese stocks in the market. In order to maintain the brand's premium positioning within the category we chose not to discount too aggressively.  Consequently, Cathedral City volumes were down 5% compared to the six months ended 30 September 2015 and sales fell by 11%. We expect volumes to improve in the second half of the year.

Our butters and spreads brands continue to grow share

IRI data for the 28 weeks ended 8 October 2016 shows that butters volumes grew by 3% but spreads volumes declined by 9%, leaving combined butters and spreads volumes down 4%.  Selling prices fell in both markets resulting in retail sales down 2% for butters, 11% for spreads and 6% combined.  Country Life and Clover have both outperformed their respective markets by some margin. 

 

Clover, our dairy spread, has grown volumes by 7% in the six months ended 30 September 2016.  This, together with the strong momentum seen in the second half of last year, has resulted in a 1.4 percentage points gain in volume market share over the last 12 months.

 

In September 2015 we re-launched Clover with 'no artificial ingredients', positioning it as a natural dairy spread, made with buttermilk and with a buttery taste. We believe that Clover is well placed should the retail price of butters inflate more than spreads in future.  We once again reinforced the 'no artificial ingredients' naturalness positioning through a marketing campaign in September 2016. We will launch new packaging in the second half of the year, further supporting the natural messaging around the brand. 

 

Country Life has continued to perform very well since the launch of the new 'Union Jack' packaging.  Volumes have grown by 8% in the six months ended 30 September 2016 and volume share is up 0.5 percentage points over the last 12 months.  Our new, improved spreadable recipe will launch in the second half of the year. 

 

Since June 2016 there have been significant increases in prices for dairy products.  In particular, the cream price has more than doubled. We expect this sharp increase in input costs to have an impact on the volumes and profitability of our butters business in the second half of the year. 

 

We continue to drive efficiency improvements at our manufacturing site in Kirkby, where all of the butter and spreads brands are produced.

Frylight enjoys excellent growth in sales

Kantar data for the 24 weeks ended 11 September 2016 indicate that the volume and value of the retail oil market increased by 1% and 2% respectively. 

 

Frylight, the UK's leading oil brand, continued to grow well ahead of the market.  Sales and volumes grew by 16% compared to the six months ended 30 September 2015.  We expect this strong performance to continue in the second half of the year.

 

The second half will see the launch of new packaging, which will emphasise the new 'no artificial ingredients' credentials.  This will be supported by TV advertising across the important fourth quarter period, which encompasses both the start of the New Year and Pancake Day.  Innovation has continued, with an avocado oil due to be launched in the second half of the year. The business is also exploring export opportunities in Europe to support its medium-term growth ambitions. We are delighted that Frylight has been singled out by the industry, winning the Institute of Grocery and Distribution (IGD) 'Health and Wellness' product award in October 2016.

 

Functional Ingredients

 

The new functional ingredients facility at Davidstow is a significant investment that gives Dairy Crest access to the fast-growing global infant formula market and potential access to the adult functional foods and the animal feed additives markets.  This marks a significant new sales channel for Dairy Crest.

 

We have been producing demineralised whey since May 2016.  The focus since then has been on operational efficiency and consistency.  Yields are improving and wastage is declining.  The required specification for infant formula grade demineralised whey is demanding and there is no room for variability. During the first six months of the year, a high proportion of our demineralised whey was sold as non-infant formula grade, which, although it commands a premium to sweet whey powder, is lower value than infant formula grade. However, the proportion of whey that is meeting the infant formula quality threshold is increasing and we expect to consistently reach our target of over 80% by the end of the financial year.

 

Whey, along with other dairy products, has experienced price rises recently.  Demineralised whey continues to deliver a price premium compared to the sweet whey powder that we produced previously.  The demineralised whey price has not risen as sharply as underlying sweet whey prices, but there is often a lag. We believe we are very well placed to benefit from any price rises in the coming months.

 

The galacto-oligosaccharide ("GOS") business is proceeding in line with plan.  In the first six months of the year we produced initial batches of GOS and we are on track to produce and sell the planned level of infant formula grade GOS in the financial year. 

 

In partnership with Fonterra we are developing the customer base for both products.

 

Our research into the potential positive impacts of GOS in animal feed continues. Initial academic trials have shown there are several benefits to feeding chickens GOS. Chickens receiving GOS exhibited improvements of over 10% in both weight gain and feed conversion rates, when compared to chickens not fed GOS. We also identified that chickens fed GOS had increased levels of beneficial bacteria and developed a greater surface area in the birds' gut which enables better absorption of nutrients. Furthermore, there are some encouraging signs of the positive benefit that GOS might be able to bring in offsetting the negative impact of pathogens, e.g. campylobacter, on bird development. This includes improved bird performance and potentially reduced infection rates.

 

We are now moving from highly-controlled academic trials to commercial trials to see whether these benefits can be sustained in the market place and we are increasing our investment by £2 million this year to support this programme.  There has already been interest from a number of commercial partners in our progress and we expect to agree a product development partnership in the near future. We have also registered Nutrabiotic® as the brand name for our GOS in animal feed.

 

Leaner, more focused organisation

 

Following the sale of the Dairies business, overheads have been significantly reduced.  We are driving further efficiencies and cost reductions, including the implementation of new, simplified IT systems.  The new platform will be more standardised than that which it replaces and will drastically reduce the number of systems we use. Reducing costs and improving efficiencies are an integral part of doing business at Dairy Crest.  The agreement with Fowler Welch, reached in June 2016, is just the latest example of this. This transferred Dairy Crest's transport operations to Fowler Welch and opens up opportunities for both companies to build a larger warehousing and logistics operation at Nuneaton, therefore improving utilisation at this site.

 

Financial review

 

Group revenue from continuing operations of £190 million represents a 7% decrease from last year, reflecting the deflationary conditions that remained a feature of our markets for much of the first half.

 

Total product group profit from continuing operations increased by 16% to £23.1 million (2015: £20.0 million). Cheese and whey product group profits increased by £2.5 million.  Butters and spreads product group profits increased by £0.6 million. Efficiencies at our butters and spreads plant in Kirkby and good growth in profits from Frylight helped to offset the effects of lower revenues and rising input costs. 

 

Finance costs of £4.0 million are in line with last year and adjusted profit before tax (from continuing operations, before exceptional items, amortisation of acquired intangibles and pension interest) was £19.1 million, up 19% from £16.0 million in 2015.  Product group analysis and a reconciliation to both adjusted and reported profit before tax is included in note 3 to the interim financial statements.

 

Net exceptional costs on continuing operations of £2.9 million were incurred during the six months ended 30 September 2016 (2015: £2.4 million). Exceptional income of £2.2 million was recognised in relation to the settlement of claims between the Group, Farmright Limited and Quadra Foods Limited at £1 million, which was lower than the creditor balance held of £3.2 million. However this exceptional income was offset by continued exceptional costs of £5.1 million in relation to the ongoing commissioning of the demineralised whey and GOS facilities at Davidstow. Exceptional costs this financial year could be further offset by the profit on disposal of an ex-manufacturing facility in Fenstanton, Cambridgeshire, should this complete before 31 March 2017. 

 

The pension interest charge of £0.4 million is £0.1 million higher than last year. The £0.2 million amortisation charge for acquired intangible assets is unchanged. This results in a reported profit before tax of £15.6 million, an increase of 19% compared to last year (2015: £13.1 million)

 

The effective rate of tax for continuing operations is 18.9% and is representative of the expected rate for the year ending 31 March 2017.

 

Adjusted basic earnings per share on continuing operations amount to 11.1 pence (2015: 9.3 pence) an increase of 19% broadly consistent with higher adjusted profit before tax. Basic earnings per share on continuing operations increased by 22% to 9.3 pence.

 

The post-tax loss on discontinued operations, being the operations of the Dairy business disposed of in December 2015, totalled £2.8 million. This predominantly reflects the final consideration reduction of £2.5 million paid back to Muller UK & Ireland Group LLP ("Müller") following the final determination of consideration adjustments by the independent expert.  Further information is reported in note 8 to the interim financial statements.

 

Operating cash inflow (before exceptional items and after capital expenditure) in the six months ended 30 September 2016 amounted to £17.5 million (2015: £10.4 million outflow). Working capital inflows of £3.0 million were lower than the £21.4 million seen last year. Milk cost deflation in the first half of 2015 was more pronounced than in the first half of 2016 as UK milk supply has tightened in recent months. Furthermore, the business carried higher than anticipated stocks of demineralised whey powder at 30 September 2016 as the testing, grading and sales process resulted in increased stock levels.

 

Capital expenditure was £10.1 million.  This represents a significant reduction compared to the £35.5 million incurred in the six months ended 30 September 2015, when we were investing in the new demineralised whey and GOS facility at Davidstow.

 

The Dairies business was sold in December 2015 and initial proceeds received during the year ended 31 March 2016 amounted to £54.5 million. These initial proceeds were subject to further adjustments relating to profit and working capital amounts in the pre-sale Dairies business compared to targeted levels. In April 2016 £25.9 million was repaid to Muller with a further £2.5 million repaid in August 2016 following the independent expert's determination of final adjustments to the consideration. There will be no further adjustments to consideration received.

 

The impact of the repayment to Muller was partly offset by a sale and lease back agreement to finance the galacto-oligosaccharide investment in Davidstow resulting in proceeds of £18 million. Overall, in line with normal seasonality, net debt increased in the first half of the year to £262.3 million but this is expected to reduce over the second half of the year.  Dairy Crest remains committed to reducing levels of net debt with a medium term target of net debt to EBITDA of 1.5 to 2.0 times.

 

The reported defined benefit pension scheme deficit was £120.5 million at 30 September 2016 compared to £42.5 million at 31 March 2016. The principal driver of this increase is reduced yields on corporate bonds, which are used to determine the discount rate applied to the pension scheme liabilities under IAS19. These fell from 3.5% at March 2016 to 2.3% at September 2016 but have strengthened since then.

 

We are currently in discussions with the Pension Fund Trustee on the actuarial valuation and revised funding plan based on a March 2016 valuation date. Until such time that this is agreed, we are subject to the March 2013 plan. This plan results in cash contributions by the Company of £13.2 million in 2016/17.

 

The principal risks and uncertainties affecting the Group are set out below the statement of directors' responsibilities and further details are disclosed on pages 16 and 17 of the 2016 Annual Report and Accounts.   

 

 

Summary and outlook

 

We are pleased to have delivered a strong set of interim results in our first full trading period since the sale of Dairies. Our four key brands are continuing to perform well in a challenging marketplace, with strong volume growth for Clover, Country Life and Frylight and a successful launch of new branding and packaging for Cathedral City.

 

We are also seeing the benefits of Dairy Crest's transformation into a leaner and more focused organisation, with strong profit growth and significantly improved cash generation during the first half. Our expectations for the full year remain unchanged.

 

Looking further ahead, the significant investment at Davidstow has opened up attractive opportunities in high-margin, global infant formula markets as well as the potential to develop new functional ingredients. Combined with our continued focus on innovation within our key brands, this will underpin future growth and help us to maintain our strong track record of rewarding shareholders with higher dividends.

 

Mark Allen

Chief Executive

10 November 2016


Consolidated income statement

     (Unaudited)

Year ended 31 March 2016





Half year ended 30 September 2016


Half year ended 30 September 2015





















Before









Before






Before





exceptional


Exceptional







exceptional


Exceptional




exceptional


Exceptional



items


items


Total





items


items


Total


items


items


Total

£m


£m


£m



Note


£m


£m


£m


£m


£m


£m





















422.3


-


422.3


Revenue

3


190.0


-


190.0


203.8


-


203.8

(360.3)


(17.3)


(377.6)


Operating costs



(167.1)


(2.9)


(170.0)


(184.4)


(2.4)


(186.8)

-


6.0


6.0


Remeasurement gain on Promovita Ingredients



-


-


-


-


-


-

3.6


-


3.6


Other income - property



-


-


-


0.4


-


0.4

65.6


(11.3)


54.3


Profit on continuing operations



22.9


(2.9)


20.0


19.8


(2.4)


17.4

(8.3)


-


(8.3)


Finance costs



(4.0)


-


(4.0)


(4.0)


-


(4.0)

(0.6)


-


(0.6)


Other finance expense - pensions



(0.4)


-


(0.4)


(0.3)


-


(0.3)

56.7


(11.3)


45.4


Profit before tax from continuing operations

3,4


18.5


(2.9)


15.6


15.5


(2.4)


13.1

(9.9)


3.0


(6.9)


Tax (expense) / credit

5


(3.5)


0.9


(2.6)


(3.1)


0.4


(2.7)

46.8


(8.3)


38.5


Profit for the period from continuing operations



15.0


(2.0)


13.0


12.4


(2.0)


10.4

(26.4)


(125.1)


(151.5)


Loss for the period from discontinued operations

8


(0.8)


(2.0)


(2.8)


(16.7)


(103.1)


(119.8)

20.4


(133.4)

 

(


(113.0)


Profit / (loss) for the period



14.2

 


(4.0)


 10.2


(4.3)


(105.1)


(109.4)

                                            All amounts are attributable to owners of the parent.           

 

 Year ended








 Half year ended 30


 Half year ended

31 March 2016


Earnings per share





September 2016


30 September 2015

27.9p


Basic earnings per share from continuing operations

7


9.3p


7.6p

27.7p


Diluted earnings per share from continuing operations

7


9.2p


7.5p

34.5p


Adjusted basic earnings per share from continuing operations *

7


11.1p


9.3p

34.2p


Adjusted diluted earnings per share from continuing operations *

7


11.0p


9.2p

(81.9)p


Basic earnings/(loss) per share

7


7.3p


(79.4)p

(81.3)p


Diluted earnings/(loss) per share

7


7.2p


(78.5)p












*Adjusted earnings per share calculations exclude exceptional items, amortisation of acquired intangibles and pension interest in relation to the Group's defined benefit pension scheme.                                                                                                                                                                                                                                                                                                                   

A final dividend of £22.4 million (16.0 pence per share) was paid in the period to 30 September 2016 (2015: £21.6 million; 15.7 pence per share). A dividend of £8.7 million (6.2 pence per share) was approved by the Board on 9 November 2016 for payment on 26 January 2017 (2015: £8.4 million; 6.1 pence per share). See Note 6.

 

Consolidated statement of comprehensive income

(Unaudited)

Year ended












Half year ended

31 March












30 September

2016












2016


2015

£m










Note


£m


£m

(113.0)


Profit/(loss) for the period








10.2


(109.4)


















Other comprehensive income to be reclassified to profit and loss in subsequent periods:







4.4


Cash flow hedges - reclassification adjustment for (losses) / gains in income statement




(8.2)


2.6

(5.4)


Cash flow hedges - gains / (losses) recognised in other comprehensive income






5.2


(2.3)

0.2


Tax credit / (expense) relating to components of other comprehensive income






0.5


(0.1)

(0.8)












(2.5)


0.2


















Other comprehensive income not to be reclassified to profit and loss in subsequent periods:







(20.5)


Remeasurements of defined benefit pension plans





10


(83.5)


1.8

1.0


Tax credit relating to components of other comprehensive income







11.0


0.4

(19.5)












(72.5)


2.2

(20.3)


Other comprehensive (loss) / gain for the period, net of tax







(75.0)


2.4

(133.3)


Total comprehensive loss for the period, net of tax







(64.8)


(107.0)



All amounts are attributable to owners of the parent.










 

 

 

Consolidated balance sheet

(Unaudited)

 

31 March










30 September

2016








2016


2015

£m






Note


£m


£m



Assets











Non-current assets








233.9


Property, plant and equipment




219.1


217.8

86.3


Goodwill






86.3


74.3

11.1


Intangible assets





10.8


18.1

0.5


Investments






-


0.5

2.3


Financial assets - Derivative financial instruments

11


9.8


0.2

19.3


Deferred tax asset





29.0


7.7

353.4








355.0


318.6



Current assets








152.1


Inventories






152.3


156.0

43.2


Trade and other receivables




31.2


65.4

16.0


Financial assets - Derivative financial instruments

11


0.1


12.0

100.3


Cash and short-term deposits


9


21.1


41.6

311.6








204.7


275.0

-


Assets of the disposal group classified as held for sale



-


72.3

311.6








204.7


347.3

665.0


Total assets





559.7


665.9














Equity and liabilities










Non-current liabilities







(250.3)


Financial liabilities

- Long-term borrowings

9


(282.3)


(202.5)

(1.3)




- Derivative financial instruments

11


-


(1.9)

(42.5)


Retirement benefit obligations


10


(120.5)


(33.2)

(4.5)


Deferred income





(3.7)


(5.3)

(298.6)








(406.5)


(242.9)



Current liabilities








(120.3)


Trade and other payables




(78.7)


(119.0)

(96.5)


Financial liabilities

- Short-term borrowings

9


(13.5)


(92.5)

-




- Derivative financial instruments

11


(1.2)


-

(3.8)


Current tax liability





(3.8)


(2.9)

(1.6)


Deferred income





(1.6)


(1.7)

(10.0)


Provisions






(5.4)


(1.9)

(232.2)








(104.2)


(218.0)

-


Liabilities associated with the assets of the disposal group classified as held for sale



-


(42.7)

(232.2)








(104.2)


(260.7)

(530.8)


Total liabilities





(510.7)


(503.6)



Shareholders' equity








(35.2)


Ordinary shares





(35.3)


(34.5)

(84.3)


Share premium





(85.6)


(80.0)

0.5


Interest in ESOP





0.5


0.1

(50.6)


Other reserves





(48.1)


(51.6)

35.4


Retained earnings





119.5


3.7

(134.2)


Total shareholders' equity




(49.0)


(162.3)

(665.0)


Total equity and liabilities




(559.7)


(665.9)

 

 

The interim results were approved by the directors on 9 November 2016.

 

 

Consolidated statement of changes in equity

(Unaudited)

 






Ordinary


Share


Interest


Other


Retained








shares


premium


in ESOP


reserves


earnings


Total

Half year ended 30 September 2016


£m


£m


£m


£m


£m


£m

At 31 March 2016



35.2


84.3


(0.5)


50.6


(35.4)


134.2

Profit for the period



-


-


-


-


10.2


10.2

Other comprehensive gain / (loss):













Cash flow hedges



-


-


-


(3.0)


-


(3.0)

Remeasurement of defined benefit pension plan


-


-


-


-


(83.5)


(83.5)

Tax on components of other comprehensive income

-


-


-


0.5


11.0

11.5

Other comprehensive loss


-


-


-


(2.5)


(72.5)


(75.0)

Total comprehensive loss



-


-


-


(2.5)


(62.3)


(64.8)

Issue of share capital



0.1


1.3


-


-


-


1.4

Share-based payments



-


-


-


-


0.6


0.6

Equity dividends



-


-


-


-


(22.4)


(22.4)

At 30 September 2016



35.3


85.6


(0.5)


48.1


(119.5)


49.0

















Half year ended 30 September 2015













At 31 March 2015



34.4


79.8


(0.1)


51.4


124.3


289.8

Loss for the period



-


-


-


-


(109.4)


(109.4)

Other comprehensive gain / (loss):













Cash flow hedges



-


-


-


0.3


-


0.3

Remeasurement of defined benefit pension plan


-


-


-


-


1.8


1.8

Tax on components of other comprehensive income


-


-


-


(0.1)


0.4


0.3

Other comprehensive gain



-


-


-


0.2


2.2


2.4

Total comprehensive gain / (loss)



-


-


-


0.2


(107.2)


(107.0)

Issue of share capital



0.1


0.2


-


-


-


0.3

Share-based payments



-


-


-


-


0.8


0.8

Equity dividends



-


-


-


-


(21.6)


(21.6)

At 30 September 2015



34.5


80.0


(0.1)


51.6


(3.7)


162.3

















Year ended 31 March 2016














At 31 March 2015



34.4


79.8


(0.1)


51.4


124.3


289.8

Loss for the period



-


-


(0.3)


-


(112.7)


(113.0)

Other comprehensive gain / (loss):













Cash flow hedges



-


-


-


(1.0)


-


(1.0)

Remeasurement of defined benefit pension plan


-


-


-


-


(20.5)


(20.5)

Tax on components of other comprehensive income


-


-


-


0.2


1.0


1.2

Other comprehensive loss


-


-


-


(0.8)


(19.5)


(20.3)

Total comprehensive loss



-


-


(0.3)


(0.8)


(132.2)


(133.3)

Issue of share capital



0.8


4.5


-


-


-


5.3

Shares acquired by ESOP



-


-


(0.3)


-


-


(0.3)

Exercise of options



-


-


0.2


-


(0.2)


-

Share-based payments



-


-


-


-


2.3


2.3

Tax on share-based payments



-


-


-


-


0.4


0.4

Equity dividends



-


-


-


-


(30.0)


(30.0)

At 31 March 2016



35.2


84.3


(0.5)


50.6


(35.4)


134.2

 

All amounts are attributable to owners of the parent.

 

 

 

Consolidated cash flow statement

(Unaudited)

 

Year ended










Half year ended

31 March










30 September

2016








2016


2015

£m






Note


£m


£m














Cash flow from operating activities






45.4


Profit before taxation - continuing operations



15.6


13.1

(187.2)


Loss before taxation - discontinued operations

8


(3.5)


(141.2)

8.9


Finance costs and other finance income - continuing operations



4.4


4.3

137.3


Loss on disposal of Dairies operation

 

8


2.5


116.1

4.4


Profit / (loss) on operations




19.0


(7.7)

23.4


Depreciation





7.6


14.9

2.0


Amortisation of internally generated intangible assets



0.3


1.7

0.4


Amortisation of acquired intangible assets



0.2


0.2

-


Impairment of investment



0.4


-

10.3


Difference between cash outflow on exceptional items and amounts recognised in the income statement (excluding disposal of Dairies operation)



(9.1)


(1.1)

(1.7)


Release of grants





(0.8)


(0.8)

2.2


Share-based payments




0.7


0.8

(3.7)


Profit on disposal of depots




-


(0.6)

(20.0)


Difference between pension contributions paid and amounts recognised in the income

statements



(5.9)


(6.7)

-


R&D tax credits





0.2


0.2

14.0


Decrease in working capital



3.0


21.4

31.3


Cash generated from operations



15.6


22.3

(12.8)


Interest paid






(7.4)


(5.2)

18.5


Net cash inflow from operating activities



8.2


17.1



Cash flow from investing activities






(66.8)


Capital expenditure





(10.1)


(35.5)

(6.0)


Purchase of businesses and investments (net of cash and debt acquired)



-


-

5.4


Proceeds from disposal of property, plant and equipment



18.0


1.4

49.0


Proceeds/(repayment) relating to sale of business net of fees

8


(28.4)


-

(18.4)


Net cash used in investing activities



(20.5)


(34.1)



Cash flow from financing activities






76.1


Issue/(repayment and cancellation) of loan notes



(80.2)


-

-


Net drawdown under revolving credit facilities



35.0


30.0

(30.0)


Dividends paid





(22.4)


(21.6)

5.0


Proceeds from issue of shares (net of issue costs)



1.4


0.3

(1.5)


Finance lease repayments




(0.7)


(0.7)

49.6


Net cash (used in) / generated from financing activities



(66.9)


8.0

49.7


Net (decrease) / increase in cash and cash equivalents



(79.2)


(9.0)

50.6


Cash and cash equivalents at beginning of period



100.3


50.6

100.3


Cash and cash equivalents at end of period

9


21.1


41.6










(229.0)


Memo: Net debt at end of period


9


(262.3)


(242.3)

 

 

Notes to the interim financial statements

(Unaudited)

 

 

1    General information

 

Dairy Crest Group plc (the "Company") is a public limited company incorporated in the United Kingdom under the Companies Act 2006.  The address of the registered office and principal place of business is Claygate House, Littleworth Road, Esher, Surrey, KT10 9PN.  The principal activity of the Company and its subsidiaries (the "Group") in the period was the processing, manufacture and sale of branded dairy products in the UK and Europe as described in the Group's annual financial statements for the year ended 31 March 2016.

 

2      Basis of preparation, accounting policies and approval of interim statement

 

Basis of preparation and approval of interim statement

 

These condensed interim financial statements comprise the consolidated balance sheet as at 30 September 2016 and related income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and supporting notes (hereinafter referred to as "financial information").

 

The financial information is not audited and does not constitute statutory financial statements as defined in section 435 of the Companies Act 2006.  Comparative figures for the year ended 31 March 2016 have been extracted from the Group's 2016 statutory accounts, on which the auditors gave an unqualified opinion, did not include an emphasis of matter reference and did not include a statement under section 498(2) or (3) of the Companies Act 2006. The comparative figures for the year ended 31 March 2016 and the half year ended 30 September 2015 reflect the impact of the Dairies operation as a discontinued operation. These sections address whether adequate accounting records have been kept, whether the Company's financial statements are in agreement with those records and whether the auditors have obtained all the information and explanations necessary for the purposes of the audit. The Group financial statements for the year ended 31 March 2016 have been filed with the Registrar of Companies and can be found on our corporate website, www.dairycrest.co.uk.

 

The financial information for the period ended 30 September 2016 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union.  The financial information should be read in conjunction with the Group's financial statements for the year ended 31 March 2016, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

 

The results for operations for the half year are not necessarily indicative of the results expected for the full year.

 

This financial information was approved for issue on 9 November 2016.

 

Going concern

 

The Directors have reviewed current performance and forecasts, combined with expenditure commitments, including capital expenditure. After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate financial resources to continue its current operations, including contractual and commercial commitments, for the foreseeable future. For this reason, they have continued to adopt the going concern basis in preparing the interim financial statements.

 

Accounting policies and areas of estimation and judgement

 

The financial information has been prepared in accordance with accounting policies used for the Group's financial statements for the year ended 31 March 2016, with the exception of the adoption of the new standards and interpretations that came into effect in the half year.

 

2    Basis of preparation, accounting policies and approval of interim statement (continued)

 

 

New standards, interpretations and amendments

 

The following accounting standards and interpretations became effective for the current reporting period:

 

- Amendment to IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

- Amendment to IFRS 7: Financial Instruments: Disclosures

- Amendment to IFRS 10: Consolidated Financial Statements

- Amendment to IFRS 11: Joint Arrangements

- Amendment to IFRS 12: Disclosure of Interests in Other Entities

- Amendment to IAS 1: Presentation of Financial Statements

- Amendment to IAS 16: Property, Plant & Equipment

- Amendment to IAS 28: Investments in Associates and Joint Ventures

- Amendment to IAS 34: Interim Financial Reporting

- Amendment to IAS 38: Intangible Assets

 

The adoption of these standards and interpretations do not have a material impact on the Group's interim financial statements in the period.

 

Taxation

 

Taxes on income in the interim periods are accrued using the tax rate that is expected to be applicable to total annual earnings for the full year in each tax jurisdiction based on substantively enacted or enacted tax rates at the interim date.

 

Key areas of judgement and estimation

 

The areas of particular significance to the Group's financial information which include the application of judgement and estimation, which is fundamental in the completion of a set of condensed consolidated interim statement, are detailed below.

 

The key areas where judgement has been applied are:

 

(i)            Nature of exceptional items

Items of a material, one-off nature, which result from a restructuring of the business or some other event of circumstance, are disclosed separately in the consolidated income statement as exceptional. Management considers this to be an area of judgement due to the assumptions made around the nature of exceptional cost. See Note 4 and Note 8.

 

(ii)           Deferred Tax Asset

The Group has recognised a deferred tax asset in relation to the trading losses of the Dairies operation. Management considers this to be an area of judgement due to the assumption made that this deferred tax asset can be set off against future trading profits despite the disposal of the Dairies operation.

 

The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next year are:

 

(i)            Calculation of promotional discount accruals

The Group accrues for agreed promotional funding. Accruals for promotional funding are calculated based on an estimated redemption rate of the promotion. The redemption rate used is dependent on the promotional mechanic and considers known historical data on the performance of that mechanic. Management considers this to be an area of judgement which is dependent on the customer mix and promotion mechanic.

 

(ii)           Measurement of defined benefit pension scheme assets and obligations

The Group recognises and discloses its retirement benefit obligation in accordance with the measurement and presentational requirement of IAS 19 'Retirement Benefit Obligations'. The calculations include a number of judgements and estimations in respect of the expected rate of return on assets, the discount rate, inflation assumptions, the rate of increase in salaries and life expectancy, amongst others. Changes in these assumptions can have a significant effect on the value of the retirement benefit obligation. There has been a change in the discount rate assumption for the valuation as at 30 September 2016 that has had a significant effect on the valuation. See Note 10.

 

 

 

 

2    Basis of preparation, accounting policies and approval of interim statement (continued)

 

 

(iii)          Estimation of tax costs in France in relation to the sale of St Hubert

The sale of St Hubert resulted in the tax payable in France both on the chargeable gain on disposal and on dividend payments made to the UK parent between 31 March 2012 and the date of disposal in August 2012. An estimate has been made of the likely tax a cost resulting from these transactions, however, the final assessment has yet to be agreed with the French tax authorities which may result in a change to the level of tax provisioning.               

 

3    Segmental analysis

 

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM").  The CODM has been determined to be the Company's Board members as they are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

 

The business is managed centrally by functional teams (Demand, Supply, Procurement and Finance) that have responsibility for the whole of the Group's product portfolio. Although some discrete financial information is available to provide insight to the management team of the key performance drivers, the product group profit is not part of the CODM's review. Management has judged that the Group comprises one operating segment under IFRS 8. As such, disclosures required under IFRS 8 for the financial statements are shown on the face of the consolidated income statement and balance sheet.

 

To assist the readers of the financial statements, management considers it appropriate to provide voluntary disclosure on a basis consistent with historical reporting of the cheese and spreads product groups results included within the consolidated income statement. In disclosing the product group profit for the period, certain assumptions have been made when allocating resources which are centralised at a group level for the continuing business and property income.

 

The 'Other' product group comprises revenue earned from distributing products for third parties and certain central costs net of recharges to the other product groups. Generally, central costs less external 'Other' revenue is recharged back into the product groups such that their result reflects the total cost base of the Group. 'Other' operating profit therefore is nil.

 

The results under the historical segmentation basis for the continuing business included in the financial information are as follows:                                                                                                                                                 

Year ended











Half year ended

31 March











30 September

2016









2016


2015

£m









£m


£m



External revenue








263.7


Cheese







115.8


128.5

152.6


Spreads







68.2


73.4

6.0


Other







6.0


1.9

422.3


Total product group external revenue - continuing operations


190.0


203.8















Product group profit *








36.4


Cheese







11.6


9.1

29.6


Spreads







11.5


10.9

66.0


Total product group profit - continuing operations



23.1


20.0

(8.3)


Finance costs







(4.0)


(4.0)

57.7


Adjusted profit before tax - continuing operations **



19.1


16.0

(0.4)


Acquired intangible amortisation




(0.2)


(0.2)

(11.3)


Exceptional items (see Note 4)




(2.9)


(2.4)

(0.6)


Other finance expense - pensions




(0.4)


(0.3)

45.4


Group profit before tax - continuing operations



15.6


13.1

 

* Profit on operations before exceptional items and amortisation of acquired intangibles.

**Before exceptional items, amortisation of acquired intangibles and pension interest.

 

Seasonality of results

Consumer demand for our products tends to be lower during the summer months as it is impacted by warm weather and school holidays. Certain products experience increased sales in the run up to Christmas. Working capital normally increases in the first six months of the year as milk production is higher during the spring and summer, however, this impact can be offset by other factors including levels of cheese sales volumes, promotional activity and milk cost movements.

 

4      Exceptional items

 

Exceptional items comprise those items that are material and one-off in nature that the Group believes should be separately disclosed to assist in the understanding of the underlying financial performance of the Group.

 

The exceptional items charge to the operating costs of the continuing operations are analysed below. The exceptional items charged in relation to discontinued operations are analysed in Note 8.

Year ended











Half year ended

31 March











30 September

2016









2016


2015

£m









£m


£m















Operating costs








(16.2)


Demineralised whey powder and GOS projects



(5.1)


(2.4)

(1.8)


Property provision




-


-

0.7


Spreads restructuring costs





-


-

-


Gain on settlement of claim by Farmright Limited


2.2


-

(17.3)




(2.9)


(2.4)

6.0


Gain on remeasurement to fair value of original investment in Promovita Ingredients Limited


-


-

(11.3)






(2.9)


(2.4)

3.0


Tax relief on exceptional items




0.9


0.4

(8.3)









(2.0)


(2.0)

 

Demineralised whey powder and GOS projects

The Group has completed an investment in its cheese creamery at Davidstow, Cornwall enabling the Group to manufacture demineralised whey powder, a base ingredient of infant formula, and galacto-oligosaccharide ("GOS"), widely used in infant formula. During the six months ended 30 September 2016 £5.1 million of exceptional costs were incurred relating to the commissioning of the facility. In the year ended 31 March 2016, £16.2 million was incurred of which £5.3 million related to the commissioning of the facility and £6.5 million on project review costs. The tax credit relating to this exceptional charge in the period was £1.3 million (year ended 31 March 2016: £2.7 million).

 

Settlement of liability in relation to Farmright Limited

On 9 May 2016, the Group paid £1.0 million in full and final settlement of claims arising out of the debt originally owed to Farmright Limited. Claims between the Group, Farmright Limited and Quadra Foods Limited (and any assignees of the claims) are now resolved. Following settlement, £2.1 million plus a provision for professional fees of £0.1 million which was no longer required, have been released as an exceptional credit in the period. The tax charge relating to this exceptional credit was £0.4 million.

 

Property provision            

During the year ended 31 March 2016, the Group commissioned a dilapidation assessment on some of its leasehold properties. The £1.8 million exceptional charge represents an increase in provision for property dilapidation liabilities on properties where the Group considers there to be a high likelihood of exiting when the lease term expires. The tax credit on this exceptional charge was £0.4 million.

 

Spreads restructuring costs         

During the year ended 31 March 2015, the Group completed the consolidation of its spreads production operations into one site in Kirkby, Liverpool. As a result of the consolidation, the site at Crudgington, Shropshire ceased production in December 2014. The exceptional credit of £0.7 million in the year ended 31 March 2016 represents the release of a prior year provision relating to the completion of this project that was not required. The tax charge relating to this exceptional credit was £0.3 million.

 

5      Taxation

 

The tax expense for continuing operations for the half year ended 30 September 2016 has been calculated on the basis of the estimated effective tax rate on pre-exceptional profit for the full year of 18.9% (September 2015: 20.0%; March 2016: 17.5%). Tax relief on exceptional costs incurred by continuing operations for the half year ended 30 September 2016 was £0.9 million (September 2015: £0.4 million; year ended 31 March 2016: £3.0 million).

 

       5       Taxation (continued)

 

The tax attributable to discontinued operations is disclosed in Note 8. As a result of the disposal of the Dairies operation on 26 December 2015, the tax credit has been calculated on actual loss for the six months ended 30 September 2016 with an effective rate of 20.0%. Tax relief on exceptional costs incurred by discontinued operations for the half year ended 30 September 2016 was £0.5 million (September 2015: £17.6 million; year ended 31 March 2016: £26.6 million).

 

The deferred tax asset of £29.0 million as at 30 September 2016 has increased by £9.7 million. The main reason for this is an increase of £90.0 million to the retirement benefit obligation.

 

6      Dividends

 

A dividend of £8.7 million (6.2 pence per share) (2015: £8.4 million; 6.1 pence per share) will be payable on 26 January 2017 to shareholders on the register on 6 January 2017. This dividend is not recorded in the balance sheet as a liability at 30 September 2016 because it had not been committed to at the balance sheet date.

 

7      Earnings per share

 

The basic earnings per share ("EPS") measures for the period have been calculated by dividing the profit attributable to equity shareholders from the relevant operations (continuing, discontinued and total group) by the weighted average shares in issue during the period, excluding those held by the Dairy Crest Employees' Share Ownership Plan Trust which are held as treasury shares and treated as cancelled.

 

The weighted average number of shares used in the calculation of basic EPS is detailed below along with the diluted weighted average number of shares used for the calculation of diluted EPS. The diluted weighted average number of shares reflects the dilutive impact of share options exercisable under the Group's share option schemes. Note that in the circumstances where there is a basic loss per share from continuing operations, share options are anti-dilutive and therefore are not included in the calculation of any other EPS measures.

 

To show earnings per share on a consistent basis, which in the Directors' opinion reflects the underlying performance of the Group more appropriately, adjusted earnings per share has been calculated.

 

Year ended















Half year ended

31 March















30 September

2016













2016


2015

£m













£m


£m



Continuing operations:











38.5


Profit attributable to equity shareholders







13.0


10.4

8.3


Exceptional items (net of tax)








2.0


2.0

0.3


Amortisation of acquired intangible assets (net of tax)







0.2


0.2

0.5


Pension interest expense (net of tax)







0.3


0.2

47.6


Adjusted earnings attributable to equity shareholders - continuing operations


15.5


12.8

















(113.0)


Total profit / (loss) attributable to equity shareholders






10.2


(109.4)

















137.9


Weighted average number of shares (million)







139.7


137.7

139.0


Diluted weighted average number of shares (million)







141.0


139.3

 



Earnings per share
























Continuing operations:








27.9p


Basic earnings per share from continuing operations




9.3p


7.6p

27.7p


Diluted earnings per share from continuing operations




9.2p


7.5p

34.5p


Adjusted basic earnings per share from continuing operations



11.1p


9.3p

34.2p


Adjusted diluted earnings per share from continuing operations


11.0p


9.2p



Total Group:









(81.9)p


Basic earnings / (loss) per share





7.3p


(79.4)p

(81.3)p


Diluted earnings / (loss) per share




7.2p


(78.5)p

 

8    Discontinued operations
 
On 26 December 2015, the Group completed the disposal Dairies operation to Muller UK & Ireland Group LLP. The Dairies operation was a major product group of the business and was therefore classified as a discontinued operation in the six months ended 30 September 2015 and in the year ended 31 March 2016. The results of the Dairies operation which have been included in the consolidated income statement within discontinued operations can be analysed as follows:
 

Year ended






Half year ended

31 March






30 September

2016




2016


2015

£m




£m


£m

529.1


Revenue


-


355.8

(562.5)


Operating costs


(1.0)


(376.5)

0.1


Other income - property


-


0.2

(33.3)


Operating loss before exceptional operating items and tax attributable to discontinued operations


(1.0)


(20.5)

(16.6)


Exceptional operating items


-


(4.6)

(49.9)


Operating loss before tax attributable to discontinued operations


(1.0)


(25.1)

9.1


Attributable tax


0.2


4.2

(40.8)


Loss after tax from discontinued operations


(0.8)


(20.9)

(137.3)


Loss on disposal


(2.5)


(116.1)

26.6


Attributable tax on disposal


0.5


17.2

(151.5)


Loss for the period from discontinued operations


(2.8)


(119.8)










Loss per share from discontinued operations





(109.9)p


Basic


(2.0)p


(87.0)p

(109.0)p


Diluted


(2.0)p


(86.0)p

 

The operating costs included in the income statement comprise certain costs relating to the Dairies operation that was not fully provided for at the date of disposal.

 

a. Net cash flows attributable to discontinued operations
 
Net cash flows attributable to the Dairies operation in the period and comparative periods are as follows:

Year ended






Half year ended

31 March






30 September

2016




2016


2015

£m




£m


£m

(51.6)


Cash flow from operating activities


(1.0)


(16.4)

(10.4)


Cash used in investing activities


-


(6.2)

(62.0)


Net cash flows attributable to discontinued operations


(1.0)


(22.6)

 

b. Exceptional items

 

Year ended






Half year ended

31 March






30 September

2016




2016


2015

£m




£m


£m

(14.4)


Exceptional operating items after attributable tax


-


(4.2)

(110.7)


Loss on disposal after attributable tax


(2.0)


-

-


Held for sale loss after attributable tax


-


(98.9)

(125.1)


Exceptional items after tax


(2.0)


(103.1)

 

 

 

8    Discontinued operations (continued)

 

Exceptional operating costs 

 

Year ended






Half year ended

31 March






30 September

2016




2016


2015

£m




£m


£m

(7.7)


Rationalisation of operating sites


-


(1.6)

(8.9)


Costs associated with the separation and sale of the Dairies operation


-


(3.0)

(16.6)


Exceptional operating costs - discontinued operations


-


(4.6)

2.2


Tax relief on exceptional items


-


0.4

(14.4)




-


(4.2)

 

Rationalisation of operating sites 

During the year ended 31 March 2016 an exceptional charge of £1.7 million was incurred in relation to the closure of the glass bottling site in Hanworth, West London (six months ended 30 September 2015: £1.2 million). This charge primarily comprised accelerated depreciation of assets as well as other associated closure costs. An exceptional charge of £6.0 million (six months ended 30 September 2015: £0.4 million) was recognised in relation to the decommissioning and demolition of the cream potting factory in Chard, Somerset which closed in September 2015. The tax credit on these exceptional items was £0.3 million (six months ended 30 September 2015: £0.3 million)

 

Costs associated with the separation and sale of the Dairies operations

In the year ended 31 March 2016, the Group incurred £8.9 million of exceptional costs in relation to the separation of its Dairies operation into a standalone operating unit. These costs included one-off systems costs and professional fees (six months ended 30 September 2015: £3.0 million). The tax credit on this exceptional charge was £1.9 million (six months ended 30 September 2015: £0.1 million)

 

Disposal of Discontinued Operations

The disposal of the Dairies operation has resulted in a post-tax loss of £112.7 million of which £110.7 million was recognised in the year ended 31 March 2016 and £2.0 million in the six months ended 30 September 2016. The net cash received consists of £54.5 million received during the year ended 31 March 2016, less £28.4 million which has been repaid to Muller in the six months ended 30 September 2016. £25.9 million was accrued for in the year ended 31 March 2016.

 



£m


80.0


(38.9)

Contribution to Muller re cost of undertaking to Competition and Markets Authority


(15.0)

Net cash received


26.1


(5.5)

Net assets and liabilities disposed


(160.4)

Loss on disposal before tax


(139.8)

Attributable tax


27.1

Loss on disposal of discontinued operations


(112.7)

 

 

9   Analysis of net debt

 

Year ended


Closing net debt





Half year ended

31 March









30 September

2016







2016


2015

£m







£m


£m

95.6


Loans repayable in less than one year *


12.0


91.2

1.5


Finance leases repayable within one year


1.5


1.4

(0.6)


Debt issuance costs



-


(0.1)

96.5


Short-term borrowings



13.5


92.5

249.2


Loans repayable in greater than one year


282.3


199.4

2.4


Finance leases repayable in greater than one year


1.7


3.2

(1.3)


Debt issuance costs





(1.7)


(0.1)

250.3


Long-term borrowings



282.3


202.5

(100.3)


Cash and short-term deposits


(21.1)


(41.6)

246.5


Borrowings and cash - before impact of cross-currency swaps


274.7


253.4

1.9


Debt issuance costs excluded


1.7


0.2

(19.4)


Impact of cross-currency swaps **


(14.1)


(11.3)

229.0


Net Debt





262.3


242.3

 

* The Group has €10.7 million (£9.2 million) and £2.8 million of loan notes that will expire on 4 April 2017. On 4 April 2016, the Group repaid $123 million (£70.2 million) and £10 million of 2006 fixed coupon loan notes on maturity.          

 

**The Group has US$126.3 million and €10.7 million of loan notes against which cross-currency swaps have been put in place to fix interest and principal repayments in Sterling (September 2015: US$204.4 million and €10.7 million; March 2016: US$249.4 million and €10.7 million). Under IFRS, currency borrowings are retranslated into Sterling at year end exchange rates. The cross-currency swaps are recorded at fair value and incorporate movements in both market exchange rates and interest rates. The Group defines net debt so as to include the effective Sterling liability where cross-currency swaps have been used to convert foreign currency borrowings into Sterling. The £14.1 million adjustment included above (September 2015: £11.3 million; March 2016: £19.4 million) converts the Sterling equivalent of Dollar and Euro loan notes from year end exchange rates (£106.5 million (September 2015: £142.8 million; March 2016: £182.0 million)) to the fixed Sterling liability of £92.4 million.

 



9    Analysis of net debt (continued)

 

Movement in net debt



Opening


Cash


Non-cash


Exchange


Closing







balances


flow


movement*


movement


balances

Six months ended 30 September 2016



£m


£m


£m


£m


£m

Cash and short-term deposits



100.3


(79.2)


-


-


21.1

Borrowings





(344.8)


60.6


-


(10.1)


(294.3)

Finance leases




 (3.9)


0.7


-


-


(3.2)

Cross-currency swaps




19.4


(15.4)


-


10.1


14.1







(229.0)


(33.3)


-


-


(262.3)
















Six months ended 30 September 2015












Cash and short-term deposits



50.6


(9.0)


-


-


41.6

Borrowings





(263.2)


(30.0)


-


2.6


(290.6)

Finance leases




-


0.7


(5.3)


-


(4.6)

Cross-currency swaps




13.9


-


-


(2.6)


11.3







(198.7)


(38.3)


(5.3)


-


(242.3)
















Year ended 31 March 2016












Cash and short-term deposits



50.6


49.7


-


-


100.3

Borrowings





(263.2)


(76.3)


-


(5.3)


(344.8)

Finance leases




-


1.5


(5.4)


-


(3.9)

Cross-currency swaps




13.9


0.2


-


5.3


19.4







(198.7)


(24.9)


(5.4)


-


(229.0)

 

*Non-cash movement relates to the recognition of finance leases on the agreement of a secondary lease term

for assets at Nuneaton.

 

10   Retirement benefit obligations           

 

The Group has a defined benefit pension scheme (Dairy Crest Group Pension Fund), which is closed to future service accrual and a defined contribution scheme (Dairy Crest Group Defined Contribution Scheme).

 

 The net pension liability of the Group's defined benefit pension scheme at 30 September 2016 can be analysed as follows:

31 March












30 September

2016










2016


2015

£m










£m


£m

43.7


Equities








18.9


46.1

592.9


Bonds and cash







740.2


574.8

1.9


Equity return swaps valuation







18.5


(6.1)

114.6


Property and other







110.9


109.3

291.3


Insured retirement obligations







317.0


288.8

1,044.4










1,205.5


1,012.9

(786.8)


Defined benefit obligation:



Uninsured retirement obligations


(1,012.6)


(741.7)

(288.0)






Insured retirement obligations


(313.4)


(285.5)

(1,074.8)


Total defined benefit obligation







(1,326.0)


(1,027.2)

(12.1)


Recognition of liability for unrecoverable notional surplus




-


(18.9)

(1,086.9)










(1,326.0)


(1,046.1)

(42.5)


Net liability recognised in the balance sheet




(120.5)


(33.2)

12.5


Related deferred tax asset







22.2


14.4

(30.0)


Net pension liability







(98.3)


(18.8)
















Analysis of movements in the Group pension deficit during the period:







(24.5)


Opening deficit before recognition of liability for unrecoverable notional surplus



(30.4)


(24.5)

(0.6)


Net finance cost







(0.4)


(0.3)

(0.8)


Administration costs incurred







(0.4)


(0.4)

(25.3)


Actuarial (loss) / gain







(95.6)


3.8

20.8


Contributions by employer







6.3


7.1

(30.4)


Closing liability (excluding liability for unrecoverable notional surplus)




(120.5)


(14.3)

 

10   Retirement benefit obligations            (continued)

 

The principal assumptions used in determining the retirement benefit obligations for the Group's pension scheme are as follows:

Mar 16




Sep 16


Sep 15

3.2


Price inflation - RPI (%)


3.2


3.2

2.1


Price inflation - CPI (%)


2.1


2.1

24.0


Life expectancy at 65 for a male currently aged 50 (years)









24.0


23.9

22.4


Average expected remaining life of a 65 year old retired male (years)








22.4


22.4

26.9


Life expectancy at 65 for a female currently aged 50 (years)








26.9


26.8

24.7


Average expected remaining life of a 65 year old retired female (years)


24.7


24.6

3.5


Discount rate (%)


2.3


3.8

 

The Company and Trustee have agreed a long-term strategy for reducing investment risk as and where appropriate. This includes an asset-liability matching policy, which aims to reduce the volatility of the funding level of the pension plan by investing in assets which perform in line with the liabilities of the plan so as to protect against inflation being higher than expected. In December 2008 and June 2009, certain obligations relating to retired members were hedged by the purchase of annuity contracts.

 

Under the latest schedule of contributions, which was signed in March 2014, the level of contributions is £13.2 million for 2016/17, £17.2 million until June 2018 and then £20.0 million per annum until March 2020. Until November 2015, the contributions included £2.8 million per annum of rental payments for land and buildings that were subject to a sale and leaseback arrangement between the Group and the Fund as part of the final schedule of contributions. The Group bought back the land and buildings for £8.3 million in November 2015 with rental payments ceasing from this date.

 

The Group is entitled to any surplus on winding up of the Fund albeit refunds are subject to tax deductions of 35% at source. Based on the present value of committed cash contributions at 30 September 2016 and the IAS 19 valuation at that date of £120.5 million there is no notional surplus and therefore no additional liability has been recognised in accordance with IFRIC 14. It should be noted that cash contributions are determined by reference to the triennial actuarial valuation, not the IAS 19R valuation.

 

11   Financial Instruments 

 

The following table summarises the Group's financial instruments.

31 March









30 September

2016







2016


2015

£m







£m


£m



Financial Assets







18.3


Cross currency swaps (cash flow hedges)

9.9


12.2

18.3







9.9


12.2













Financial Liabilities








(1.3)


Forward currency contracts





(1.2)


(1.9)

(105.0)


Bank loans (at amortised cost)





(140.0)


(135.0)

(239.8)


Loan notes (at amortised cost)





(154.3)


(155.6)

(3.9)


Obligations under finance leases





(3.2)


(4.6)

1.9


Debt issuance costs





1.7


0.2

(348.1)







(297.0)


(296.9)

 

Fair values of financial assets and financial liabilities

The carrying amounts and the fair values of all of the Group's financial instruments that are carried in the financial statements are the same with the exception of the loan notes. The carrying value of the loan notes was £154.3 million and the fair value was £153.8 million. The fair value of borrowing has been calculated by discounting the expected future cash flows at a prevailing interest rate.

 

 

 

11 Financial Instruments (continued)

 

Fair value hierarchy

All derivative financial instruments and loan notes are fair valued at each balance sheet date and all comprise Level 2 valuations under IFRS 13: Fair value measurement, namely, that they are based on inputs observable directly (from prices) or indirectly (derived from prices).

 

 Valuation techniquesThe fair values of cross currency swaps and forward exchange contracts are measured by the external counterparties to the contracts and verified using present value of future cash flows at discount rates implied by the forward curve. These valuation techniques maximise the use of observable market data where it is available.

 

The fair value of loan notes has been measured by reference to yields of publicly quoted debt of equivalent duration, coupon and credit-worthiness.

 

12   Commitments and contingencies

 

Capital expenditure contracted for but not provided for in the interim financial statements amounts to £10.7 million (September 2015: £32.7 million; March 2016: £13.1 million).         

 

During the six months ended 30 September 2016, certain assets at the the galacto-oligosaccharide ('GOS') facility at Davidstow were sold for a cash consideration of £18.0 million. This equipment has been leased back under an operating lease for a seven year term. The future rentals payable under the operating lease are £2.5 million per annum.

 

 

Statement of directors' responsibilities

 

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules. The Board of Directors that served during the six months ended 30 September 2015, and their respective responsibilities, can be found on pages 28 and 29 of the 2016 Annual Report and Accounts.                                                                     

 

By order of the Board

 

M Allen                                                   T Atherton

Chief Executive                                    Finance Director

9 November 2016                                               9 November 2016              

 

 

Principal risks and uncertainties

 

The Board considers risk assessment, identification of mitigating actions and internal controls to be fundamental to achieving Dairy Crest's strategic corporate objectives. The principal factors considered when assessing Dairy Crest's ability to achieve its short-term and long-term objectives are:

 

-       Economic, cultural and market conditions which influence consumer and customer behaviour;

-       Relationships with dairy farmers and future milk sourcing;              

-       The impact of increased milk costs and the volatility of ingredients and other commodity markets;

-       Investing in our brand portfolio and innovative new product development;

-       Attracting and retaining the best people;               

-       Maintaining high levels of food safety standards and operational performance across the manufacturing base;

-       Impact of financial market turmoil on pension scheme assets and future funding requirements;

-       Regulatory and legal risks; and

-       Environmental trends and risks.

 

There have been no significant changes in the material risks faced by the Group since publication of the 2016 Annual Report. The processes by which the Board safeguards shareholder value and the assets of the Group and risks and uncertainties that would have a significant impact on long-term value generation are set out in the 2016 Annual Report and Accounts on pages 16 to 17.     



INDEPENDENT REVIEW REPORT TO DAIRY CREST GROUP plc

 

Introduction

 

We have been engaged by the Dairy Crest Group plc ("the Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2016 which comprises consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and notes to the interim financial statements (unaudited). We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

Ernst & Young LLP

London

9  November 2016

 

 

 


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